Option Investor

Daily Newsletter, Tuesday, 8/26/2014

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

S&P Closes Above 2000.

by Jim Brown

Click here to email Jim Brown

That headline is true but only barely with the S&P closing at 2000.02 and it was a struggle at the close.

Market Statistics

The S&P is struggling to move over that 2000 level but at least it has not been reactive for sellers. As long as it keeps holding there it will eventually move higher. The markets should have been strong today after the economic reports this morning.

Durable goods orders for July were a blowout with a +22.6% gain compared to estimates at +6.9% and the +0.7% rise in June. The driving force was a +318% increase in nondefense aircraft orders. Excluding transportation orders the index fell -0.8% and core capital goods orders fell -0.5%.

Durable goods shipments increased +3.3% in July. Nondefense shipments rose +3.4% and core capital goods ex-aircraft rose +1.5%. In theory this will be good for Q3 GDP.

Defense orders continued to decline with a -15.3% drop and the second double digit decline in three months. Orders were strong earlier in the year so this is just a cycle problem. The government's fiscal year starts on October 1st so agencies are probably out of money until the next budget year begins in October.

Transportation goods orders rose +74.2%. Orders for vehicles and parts rose +10.2% while transportation shipments rose +7.9%.

The headline gain of +22.6% is just a one month blip thanks to the orders from the Paris air show. Even though this was a one month blip it will dramatically impact the Q3 GDP.

The Richmond Fed Manufacturing Survey rose from 7 in July to 12 in August. That is the highest reading since March 2011. Manufacturing in the Richmond area is on the verge of breaking out of a multiyear consolidation. The new orders component rose from 5 to 13 and the backorders component shot up from zero to 15. Employment declined slightly from 13 to 11 but the average workweek component rose from 3 to 8 suggesting they will be hiring new workers soon. The expected average wage component rose from 23 to 28. Capex spending plans rose from 19 to 27 and that is bullish. It means manufacturers are confident enough about the future they are willing to invest new money. Over the last several years companies have been hesitant to invest money because of economic and political uncertainty.

The corresponding services survey Revenue Index rose from 12 to 21. The gains were driven by retail sales more than the services component. All seven retail sales components posted gains. The component for big ticket items soared with a jump from zero to 28. Shopper traffic rose from 35 to 48.

These were bullish reports and the market should have been excited. While it may mean the Fed could raise rates sooner than expected it would be for the right reason of accelerating growth.

The Texas Service Sector Outlook for August was nearly unchanged with a rise from 22.4 to 22.8. The internal components posted minor changes with employment the only hot spot with a rise from 4.6 to 13.2. The outlook for Texas was flat.

Consumer Confidence for August rose from 90.3 to 92.4 and nearly a seven-year high. Confidence has accelerated to the upside over the last year and this bodes well for the economy. The present conditions component rose from 87.9 to 94.6 and the expectations component declined slightly from 91.9 to 90.9. The percentage of respondents that felt jobs were plentiful rose from 15.6% to 18.2% and that is a huge jump. Those planning on buying a car rose from 12.3% to 12.9%. Home buyers rose from 4.6% to 4.9% but appliance buyers declined from 48.7% to 45.7%.

The economic calendar for the rest of the week is highlighted by the Q2-GDP revision on Thursday and the ISM Manufacturing on Friday. With volume declining every day there won't be many traders around to react to those reports when they come out. That can be good or bad since a low volume market can be volatile if the news is dramatically different than expectations.

Stock news was also pretty slim. The Burger King (BKW) merger with Tim Horton (THI) for $11 billion is now confirmed and if approved will create a $22 billion company with 18,000 stores in 100 countries with sales of $23 billion. Burger King will get a popular breakfast lineup and a cheaper maximum tax rate. The maximum in Canada is 26.5% and they don't tax earnings that are made overseas unlike the USA. BKW earns 40% of its revenue and earnings overseas and that cash is trapped overseas unless BKW wants to bring it back and pay taxes on it.

Warren Buffett went against President Obama by lending Burger King $3 billion to help finance the transaction. Buffett had previously supported the president's anti-inversion campaign. Apparently making money is still important and Berkshire will end up with $3 billion in preferred stock with a 9% dividend out of the deal.

Only two days into the BKW/THI deal and already Moveon.org is sponsoring a petition to scuttle the "Whopper Tax Dodge" and institute a boycott. MSNBC hosts are also calling for a boycott and trying to get burger buyers to switch to Wendy's. On Twitter the #BoycottBurgerKing movement is gaining steam. The thing about boycotts is they don't last. The movements may sound like a good idea to the organizers but they tend to rise and fall quickly. A month from now nobody will remember it.

On the surface analysts and investors like the deal with the shares of both companies rising.

Amazon (AMZN) gained +8 after announcing the purchase of the streaming game website Twitch. The all cash deal for $970 million came after a potential acquisition by Google fell apart. Twitch said they chose Amazon because "they believe in the Amazon community and they share our values and long term vision. They want to help us get there faster." Google wanted to put the Twitch platform under the Google brand and stream the games on YouTube. Users revolted over the potential connection and complained loudly. The Twitch app allows millions of gamers to watch games streamed by over one million hard core gamers. There were 55 million watchers in July. By watching a pro player you can learn the tips and tricks of your favorite game and that makes you a better player. Twitch streams billions of minutes a month and has a rabid following.

The Twitch website has had trouble keeping up with the millions of live streams and Amazon is exactly the instant fix for that with the largest cloud on the planet. Amazon began developing games in 2012 but has yet to produce any heavyweight crowd favorites. They have hired the developers from successful games like Portal and Killer Instinct so they are working on building a portfolio of crowd pleasers.

This was a good deal for Amazon and a good deal for Twitch. Jeff Bezos needs to attract the younger crowd to Amazon because they will eventually turn into shoppers. They will also buy games when Amazon begins to turn them out in volume.

Best Buy (BBY) lost -7% after reporting revenue that declined -4% to $8.89 billion and missing estimates for $8.99 billion. Earnings of 44 cents easily beat estimates of 31 cents but that is where the good news ended. Same store sales declined -2.7% and operating margins fell from 4.5% to 2.7%.

The retailer warned that same store sales would decline in low single digits for the rest of the year and operating margins would continue to shrink due to higher sales of low margin items and strong discounting in Canada and China. The company said sales by online retailers were impacting margins and revenue.

In a recent Nielsen survey 42% of respondents said they would likely buy TVs and cameras online, up from 15% a year ago. Best Buy announced a plan last year to match the lowest prices offered by local and online retailers and that hurt margins. Industry wide consumer purchases of TVs and desktop and notebook computers declined -2.5% in the quarter.

The CEO said he does not expect a "huge lift" from "phones released this year" because so many consumers already have high end phones and contracts. Best Buy is also unsure how much inventory it will receive. As a result they guided for lower sales the rest of the year. He did not specifically mention iPhone but that was the clear topic of the conversation. The CFO said about the lowered expectations "We don't live on wishes and hopes." Shares declined -7% on the news.

Smith & Wesson (SWHC) shares fell -10% after slashing sales forecasts to a range of $530-$540 million, down from $585-$600 million. Projected profits will be 89-94 cents, compared to $1.30-$1.40 in the prior forecast. The company cited high inventory levels and sluggish summer sales. The company said sales of "modern sporting rifles" had seen a drop in demand. That term is the new industry standard for the AR-15 style rifle. Prices have dropped from $1500-$2000 early in President Obama's first term to $600-$700 for the base model today. Price volatility is huge whenever the president makes antigun comments or threatens new rules. He has been called the greatest gun salesman ever. Ruger Firearms (RGR) fell -$3 on the S&W news.

Apple (AAPL) shares declined slightly on the Best Buy phone comments but still closed over $100. The weakness is probably going to be minimal because investors will continue to expect a huge product announcement in September. An Apple supplier said they were starting work on a new 12.9 inch iPad that will be released in 2015. Apple currently makes 9.7 inch and 7.9 inch iPads. Reportedly Apple has been working with suppliers for at least a year to develop a new range of larger touch screen devices. With iPad sales declining it is due for a refresh. The larger screen device could take on more tasks currently done on a notebook or laptop computer. Corporations are expected to be big buyers of the larger devices.

The S&P closed over 2000 by the smallest of margins at 2000.02 after trading just under the 2000 level in the seconds before the close. This is a psychological level and not a real technical event. The real resistance is still well above at 2025-2030. However, psychological levels still matter. The difficulty the S&P has had this week with making any gains over 2000 is evidence there are sellers taking advantage of this milestone to take profits.

At the same time there has not been a rush to sell. I expected at least a minor decline once that 2000 bell was rung and that did not occur. It still might happen since we are struggling to extend the gains but the lack of selling suggests we could be going higher.

Volume yesterday was the lowest non-holiday volume of the year at 4.2 billion shares and today was not much better at 4.4 billion. The closer we get to the weekend the lower the volume will be. The indexes are likely to stagnate and be subject to the whims of hedge fund program trading. They would love to cause a low volume 20 point run on the S&P in either direction but I seriously doubt they will be able to accomplish that. More than likely the markets will continue to creep higher without any material headlines to drive the market.

However, that long streak of green candles over the last two weeks is begging for some profit taking. That could happen at any time but more than likely after Labor Day.

The Dow rallied to a new intraday high at 17,153 but could not hold it. The record close was 17,138 and it could not hold that level either. The multiple bands of converging resistance at the 17,110-17,150 level are strong and the Dow is over extended from its August rebound. Like the S&P the string of green candles needs a dose of red at the top before we surge too much higher.

The Nasdaq is the index with the superiority complex. The tech index just keeps clawing its way higher and every little intraday dip is bought. Actual resistance on the Nasdaq is just over 4600 but it has the same need for some profit taking as the S&P and Dow. The biotechs are powering the recent move but they are being helped by other sectors as well. The buyers are maintaining a bid just under the market and every dip is bought. Support remains 4515.

The Russell 2000 made a critical move today. The index spiked above strong resistance at 1165 on Monday but fell back to close right on that level. Today the Russell opened strong and never looked back to close at 1175. This breakout over 1165 is very bullish. The next material resistance is the old high at 1208. If the small caps are rising again the bulls are back.

People keep asking what is pushing stocks higher. The answer is simple. The Fed is still injecting $25 billion a month into the market and the yields on bonds are still ridiculously low with the ten-year at 2.39%. Add in the rising dollar and falling markets overseas and we are the only market in the world worth investing in today. Overseas funds are flowing in and the Fed is still making sure there is no alternative to stocks.

Obviously this is eventually going to come to a screeching halt but probably not until later this year. There will come a day of reckoning but if the economy accelerates there may be a new reason to buy stocks and that would be rapidly rising profits.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Potential Short Squeeze

by James Brown

Click here to email James Brown


Ubiquiti Networks - UBNT - close: 46.03 change: +0.08

Stop Loss: 43.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 902 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
UBNT is in the technology sector. The company operates in the wireless technology and networking industry. According to the company press release, "Ubiquiti Networks is closing the digital divide by building network communication platforms for everyone and everywhere. With over 20 million devices deployed in over 180 countries, Ubiquiti is transforming under-networked businesses and communities. Our leading edge platforms, airMAX, airFiber, UniFi, UniFi Video, UniFi VoIP, mFi and EdgeMAX combine innovative technology, disruptive price performance and the support of a global user community to eliminate barriers to connectivity."

The company has been consistently beating earnings estimates. They just wrapped up their fiscal year 2014 with the earnings report on August 7th, 2014. The company managed to beat estimates all four quarters. Their 2014 Q4 numbers showed sales up +54% from a year ago while EPS were up +70%.

It has been a rocky year for the stock price in spite of the company's earnings track record. If you recall the stock market suffered a pullback in March this year. The high-growth stocks and momentum names were hit pretty hard. UBNT was one of those that was punished and shares collapsed from $55 to $30 over the next several weeks. Since then UBNT has been slowly recovering.

Right now the stock is on the verge of breaking through resistance. A new breakout could spark some short covering. The most recent data listed short interest at 32% of the small 26.6 million share float.

We are suggesting a trigger to open bullish positions at $46.75.

Trigger @ $46.75

- Suggested Positions -

- (or for more adventurous traders, try this option) -

Buy the OCT $48 call (UBNT141018C48) current ask $2.05

Option Format: symbol-year-month-day-call-strike

Annotated Chart:

Weekly Chart:

In Play Updates and Reviews

Tuesday Shock: Small Caps Showing Strength

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 closed above 2,000 for the first time. Meanwhile the Russell 2000 actually displayed relative strength. Will the small caps pick up the ball and keep the rally alive? Or will the large caps stall with the S&P 500 at resistance?

Prepare to exit our CPHD trade tomorrow morning.

Current Portfolio:

BULLISH Play Updates

Delta Air Lines - DAL - close: 39.90 change: -0.62

Stop Loss: 37.65
Target(s): To Be Determined
Current Option Gain/Loss: -2.1%
Entry on August 21 at $40.75
Listed on August 19, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 11 million
New Positions: see below

08/26/14: I am starting to worry about DAL. Both the Dow Transportation Average and the XAL airline index have stalled. Shares of DAL have stalled the last few days.

If the market rally stalls, I suspect that DAL could dip toward support near $38.00 before bouncing and resuming its up trend.

If you're not willing to give DAL that much room then consider raising your stop loss.

I am not suggesting new positions at the moment.

Earlier Comments: August 20, 2014:
Delta is the world's second biggest passenger airliner on the planet. They serve almost 165 million customers a year. Believe it or not but they started back in 1924 as an aerial crop dusting company called Huff Daland Dusters. Now they have almost 80,000 employees and a fleet of more than 700 planes that fly to 334 destinations in 64 countries on six continents.

A lot of investors look at the airline stocks as value plays. That's easy to see given their cheap multiples. DAL has a P/E of 3.1. Yet the company is seeing growth as well. Last year the airlines were big winners with the market's 2013 rally. This year could be another strong one thanks to falling oil prices. There has been a lot of geopolitical headlines but none of them seem to be pushing oil prices higher. Instead crude oil prices are falling. That's a huge deal for the airline companies because fuel is their largest expense. DAL has the lowest fuel costs in the business because they own their own refinery. The company expects that their fuel hedging and refinery operations should cut their fuel costs by $350 million this year.

More than 60% of DAL's business is in the U.S. The country's slow economic improvement has helped fuel gains for DAL. The airline has beaten Wall Street's bottom line estimates four quarters in a row. Back in June they raised guidance. Their most recent earnings report was July 23rd where they delivered a profit of $1.04 a share, one cent above estimates. DAL management that said their pre-tax profit was $1.4 billion, which is a +70% improvement from a year ago. They ended the second quarter with debt at less than $8 billion, which is a 20-year low. DAL's margins have been improving. Management expects margin improvement to continue and should see a jump from 13.5% to 15-17% in the third quarter.

Technically DAL saw a correction from $42 to $35 (-16%) from its June highs. Investors bought the dip again near $35.00 in early August. Now DAL has built what appears to be a bullish double bottom. The current bounce from its August lows is breaking through resistance.

If this trend continues we want to hop on board. Tonight we're suggesting a trigger at $40.75. The 2014 high near $42.50 could be short-term resistance but longer-term DAL looks poised to breakout.

- Suggested Positions -

Long DAL stock @ $40.75

- (or for more adventurous traders, try this option) -

Long 2015 Jan $45 call (DAL150117C45) entry $1.70*

08/21/14 triggered @ 40.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Green Plains Inc. - GPRE - close: 43.81 change: -0.76

Stop Loss: 40.95
Target(s): To Be Determined
Current Option Gain/Loss: +7.5%
Entry on August 11 at $40.77
Listed on August 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.4 million
New Positions: see below

08/26/14: GPRE hit some profit taking today with a -1.7% decline. The stock should find short-term support at its 10-dma (near 43.45) and its 20-dma (near 41.65). Investors might want to move their stop closer to the 20-dma. I'm not suggesting new positions at this time.

Earlier Comments: August 09, 2014:
GPRE has been a monster stock for investors over the last couple of years. Summer of 2012 the stock was trading for less than $5.00 a share. Today GPRE is trading at levels not seen since early 2006. The company is considered part of the basic materials sector. They're listed in the specialty chemicals industry. What they do is make ethanol and a lot of it.

According to the company website, "Green Plains is a vertically-integrated ethanol producer based in Omaha, Nebraska. We currently have an ethanol production capacity of approximately 1.0 billion gallons per year with our 12 plants." Another big part of their business is "Distillers grains are an important co-product of Green Plains’ ethanol production. At capacity our plants will produce approximately 2.9 million tons of distillers grains annually that will be used as a high-protein, high-energy animal fodder and feed supplement. Corn oil is also a co-product of ethanol production that is being extracted at all 12 of our plants."

Earlier this year GPRE made headlines when they purchased their own cattle-feed yard. Distiller's grain is a byproduct of the ethanol production process. Previously GPRE would try and sell it to ranchers as cattle feed. Sometimes that proved difficult to sell all of its distiller's grain. GPRE has decided a great way to handle the problem is buy their own cattle yard. They'll be able to raise their own cattle with the byproduct of their main business of ethanol production.

Of course ethanol is their main product and it could be a great year for GPRE. The company's input costs for their main ingredients of corn and natural gas have been falling in 2014. That's going to boost their ethanol margins. Piper Jaffray actually upgraded GBX in July on this dynamic and raised their price target on GPRE to $45.00.

It looks like the ethanol market is pretty healthy. The U.S. saw ethanol exports soar +56% in the first six months of 2014. Most of that went to Canada. Demand for ethanol could go up if some senators have their way. A handful of senators are pushing to boost the EPA's requirement on ethanol in our fuel. If they are successful it would raise the ethanol requirements by +40%.

The stock has displayed significant relative strength. The S&P 500 index is up +4.5% year to date. GPRE is up +108%. More and more mutual funds have been adding GPRE to their portfolio. Yet not everyone agrees with the bullish outlook on GPRE. Short interest is climbing as well. The most recent data listed short interest at 25% of the small 28.6 million share float. If this rally continues it could spark more short covering.

The last few days have seen GPRE consolidating sideways in the $39.50-40.60 zone. Tonight we are suggesting a trigger to open bullish positions at $40.75. We will try and limit our risk with a stop loss at $38.40.

We are not setting an exit target tonight but I will note that the point & figure chart is bullish and suggesting at $69.00 target.

- Suggested Positions -

Long GPRE stock @ $40.77

- (or for more adventurous traders, try this option) -

Long Dec $45 call (GPRE141220C45) entry $2.95*

08/23/14 new stop @ 40.95
08/14/14 GPRE announces $100 million buy back and doubles dividend to 8c.
08/13/14 new stop @ 39.25
08/11/14 trade opens on gap higher at $40.77, trigger was $40.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Microsoft Corp. - MSFT - close: 45.01 change: -0.16

Stop Loss: 42.90
Target(s): To Be Determined
Current Option Gain/Loss: +2.1%
Entry on August 14 at $44.08
Listed on August 13, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 36 million
New Positions: see below

08/26/14: MSFT continues to churn sideways. Momentum has stalled over the last five days. I would expect shares to dip toward $44.00.

I am not suggesting new positions at this time.

Earlier Comments: August 13, 2014:
Microsoft Corp. is a technology behemoth. The company was founded in 1975. They have grown into a massive company with 128,000 employees around the world. Their software is used by billions of people every day. They also offer technology services, tablets, X-box gaming platform, networking and server software, and their Nokia division. MSFT has jumped head first into the cloud computing industry. Altogether MSFT generated almost $87 billion in sales the past 12 months with a net income of $22 billion.

Investors worried about MSFT and how the death of the PC would slowly chip away at its core products - mainly the Windows operating system and Microsoft Office. However, this past summer there has been evidence that the PC market isn't dead. Intel reported stronger than expected chip sales for PCs, especially to enterprise customers. Meanwhile MSFT stopped supporting the Windows XP operating system. MSFT released the XP system back in 2001. Their decision to stop providing updates means the XP system could become less secure to viruses, malware, and hacking. One analyst estimated that 25% of the PCs currently connected to the Internet were still running XP. That's millions and millions of computers that will need to either upgrade their software or likely be scrapped and upgraded to a new computer with a newer version of MSFT's software. The upgrade cycle could last a while.

Investors have been pretty optimistic since Satya Nadella was crowned CEO of MSFT back in February this year. He has been focusing the company on the cloud and it seems to be working. MSFT's commercial cloud revenues soared +147% with sales on track to exceed $4 billion a year. Even Bing, MSFT's search engine rival to Google, is improving. Bing's ad revenues rose +40% last quarter and snatched almost 20% of the search engine market. MSFT expects their Bing division to turn profitable in 2016.

MSFT's most recent earnings report on July 22nd was mixed. They missed the bottom line estimate by 5 cents. Yet revenues came in ahead of expectations. Wall Street was looking for quarterly revenues of $22.99 billion. MSFT reported $23.38 billion. Several analyst firms upgraded their outlook on MSFT following the earnings report. Many of the new price targets are in the $50 area.

Technically shares of MSFT have a bullish trend of higher lows. The stock saw some post-earnings depression in the second half of July but now that's over and investors are buying the dip.

Tonight I am suggesting investors open bullish positions tomorrow morning. We'll try and limit our risk with a stop loss at $41.75.

- Suggested Positions -

Long MSFT stock @ 44.08

- (or for more adventurous traders, try this option) -

Long 2015 Jan $50 call (MSFT150117c50) entry $0.45

08/23/14 new stop @ 42.90
08/14/14 trade begins. MSFT opens at $44.08
Option Format: symbol-year-month-day-call-strike

Skyworks Solutions - SWKS - close: 54.70 change: -0.06

Stop Loss: 49.95
Target(s): To Be Determined
Current Option Gain/Loss: +3.9%
Entry on August 07 at $52.65
Listed on August 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.3 million
New Positions: see below

08/26/14: SWKS suffered some profit taking in the first hour of trading. Shares managed an intraday bounce and pared its loss to just six cents. I am not suggesting new positions at this time. More conservative investors may want to raise their stop loss closer to $52.00.

Earlier Comments: August 2, 2014:
The semiconductor stocks have led the market higher most of the year but the SOX semiconductor index has reversed sharply in the last couple of weeks. This correction in the SOX has shaved its year to date gains to +13.9%. Shares of SWKS have not seen the same pullback and this semiconductor stock is up +82% this year and looks poised to keep the rally going.

Who is SWKS? According to the company website, " Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

Following SWKS's much better than expected report there was a wave of bullish analyst comments. Several firms raised their SWKS price targets into the $60-65 zone. SWKS's bullish guidance is probably due to Apple's new iPhone 6, which is expected to be unveiled in September. Odds are good that SWKS will rally into Apple's product launch in September.

Shares of SWKS were showing relative strength on Friday with a bounce from support near $50.00 and a bullish engulfing candlestick pattern. We are suggesting a trigger to launch bullish positions at $52.65.

- Suggested Positions -

Long SWKS stock @ $52.65

- (or for more adventurous traders, try this option) -

Long Nov $55 call (SWKS141122C55) entry $2.86

08/13/14 new stop @ 49.95
08/07/14 triggered @ 52.65
Option Format: symbol-year-month-day-call-strike

WhiteWave Foods Co. - WWAV - close: 34.75 change: -0.15

Stop Loss: 31.40
Target(s): To Be Determined
Current Option Gain/Loss: -0.5%
Entry on August 19 at $34.91
Listed on August 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

08/26/14: WWAV spent Tuesday churning sideways in the $34.50-35.00 zone. A close above potential round-number resistance at $35 would be encouraging but I am not suggesting new positions at this time.

Earlier Comments: August 16, 2014:
Consumer tastes and buying habits are changing and more people are opting for more natural and organic foods.

WWAV is in the consumer goods sector. You might not recognize the name but they're behind brands like Silk, Horizon Organic, Land-O-Lakes, International Delight, Alpro, and Earthbound Farm Organic.

WWAV considers themselves "a leading consumer packaged food and beverage company that manufactures, markets, distributes, and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce throughout North America and Europe. The Company is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products. The Company's widely-recognized, leading brands distributed in North America include Silk plant-based foods and beverages, International Delight and LAND O LAKES* coffee creamers and beverages, Horizon Organic premium dairy products and Earthbound Farm' certified organic salads, fruits and vegetables. Its popular European brands of plant-based foods and beverages include Alpro and Provamel" (The Land-O-Lakes brand is licensed from the owners).

If you're looking for a company that is growing then keep an eye on WWAV. They have beaten Wall Street's estimates on both the top and bottom line at least four quarters in a row. The last three quarters management has been raising their guidance. In Q4 2013 WWAV's revenues were up +11.5%. The first quarter of 2014 saw revenues soared +36.5%.

Their latest report was August 7th. Analysts were looking for a profit of $0.22 on revenues of $815.6 million. WWAV delivered a profit of $0.23 with revenues climbing +39.5% to $837.9 million.

The natural and organic retailers might be facing tougher margins and stronger competition (WFM, SFM, TFM, NGVC) but that doesn't seem to be the case for a producer and distributor like WWAV.

You can see the big surge in the stock price on August 7th as traders reacted to the bullish earnings news and guidance. After consolidating gains the last few days shares of WWAV have started to push higher again. They have been outperforming the major market indices and WWAV closed at a new all-time highs on Friday.

We believe the rally continues but I am labeling this a more aggressive, higher-risk trade due to WWAV's recent volatility. The last several weeks have seen some significant swings.

Friday's intraday high was $34.06. We're suggesting a trigger to open bullish positions at $34.15.

- Suggested Positions -

Long WWAV stock @ $34.91

- (or for more adventurous traders, try this option) -

Long OCT $35 call (WWAV141018C35) entry $1.70*

08/19/14 trade opens on gap higher at $34.91, suggested entry point was $34.15.
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

BEARISH Play Updates

Cepheid - CPHD - close: 39.13 change: +0.64

Stop Loss: 40.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.2%
Entry on July 28 at $39.20
Listed on July 26, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 680 thousand
New Positions: see below

08/26/14: The bearish momentum in shares of CPHD has stalled. The stock looks like it may have formed a bottom. We are throwing in the towel. I'm suggesting an immediate exit tomorrow morning.

- Suggested Positions -

Short CPHD stock @ $39.20

- (or for more adventurous traders, try this option) -

Long SEP $40 PUT (CPHD140920P40) entry $2.35

08/26/14 prepare to exit tomorrow morning
08/13/14 new stop @ 40.25
07/31/14 new stop @ 40.51
07/28/14 triggered @ 39.20
Option Format: symbol-year-month-day-call-strike

Natural Grocers by Vitamin Cottage - NGVC - close: 18.89 change: -0.04

Stop Loss: 20.10
Target(s): To Be Determined
Current Option Gain/Loss: +2.9%
Entry on August 12 at $19.45
Listed on August 11, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 209 thousand
New Positions: see below

08/26/14: Trading volume in shares of NGVC just vanished today. That makes any more today suspect. We could find the lack of follow through on its recent bounce encouraging but without any volume we can't trust it.

I am not suggesting new positions at this time. More conservative investors might want to lower their stop loss again.

Earlier Comments: August 11, 2014:
The last six to nine months have not been good for the natural food and organic-related retail chains. Whole Foods (WFM), The Fresh Market (TFM), Sprouts Farmers Market (SFM), and Natural Grocers have all underperformed the market by a wide margin.

According to NGVC's press release the company was "founded in Colorado by Margaret & Philip Isely in 1955, Natural Grocers was built on the premise that consumers should have access to affordable, high-quality foods and dietary supplements, along with nutrition knowledge to help them support their own health. The family-run store has since grown into a successful national chain with locations across Colorado, Texas, Utah, Wyoming, Oklahoma, Missouri, New Mexico, Montana, Kansas, Idaho, Nebraska, Arizona and Oregon, and employs over 2000 people. Although the company went public in July 2012, Isely family members continue to manage the company day to day, building on the foundation of their parents' business."

The good news is that the natural food and organic food craze is reaching a wider audience and more and more consumers are making healthier choices. The bad news is that this previously higher-margin business, in a notoriously low-margin industry, has drawn tons of competition. That has been the biggest challenge. Big players like Wal-mart and Target in addition to major regional grocery chains are all starting to offer more natural and organic wares. Meanwhile those already in the space are competing with each other as well. Margins are shrinking as competition heats up.

Shares of NGVC plunged back in May after the company lowered its same-store sales forecast for 2014. The stock dropped again on August 1st following its earnings report. Earnings were in-line with estimates but guidance was soft.

The path of least resistance is down and NGVG looks headed for its all-time lows in the $17.00 area.

The biggest risk with this bearish positions on NGVC is the crowd. There are a lot of investors already bearish on this stock. The most recent data listed short interest at 33.3% of the very, very small 5.1 million share float. That significantly raises the risk of a short squeeze.

We are suggesting bearish positions with a trigger to short NGVC at $19.45 but I am labeling this an aggressive, high-risk trade. NGVG does have options but most of the option spreads are too wide. We will try and limit our risk with a stop loss at $21.05.

*Aggressive Trade* Use small positions. - Suggested Positions -

short NGVC @ $19.45

08/21/14 new stop @ 20.10
08/12/14 triggered @ 19.45

Papa John's Intl. Inc. - PZZA - close: 39.57 change: +0.03

Stop Loss: 41.25
Target(s): To Be Determined
Current Option Gain/Loss: +0.0%
Entry on August 25 at $39.56
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 368 thousand
New Positions: see below

08/26/14: PZZA delivered another quiet session on Tuesday. Shares closed virtually unchanged.

I would still consider new positions now at current levels or if you're nimble look for a failed rally near $40.00.

Earlier Comments: August 23, 2014:
Papa John's was founded back in 1985 and headquarter in Louisville, Kentucky. They have grown into the planet's third largest pizza delivery company. There are over 4,400 Papa John locations in all 50 U.S. states and 35 countries. The good news for PZZA has been their international growth. They're growing in the U.S. as well but international growth has been outperforming.

Last year was a banner year for the stock price. Shares virtually doubled from their 2013 low to their December 31st close. The rally kept going in 2014. However, momentum reversed in March when many of the momentum names were crushed. PZZA suffered a multi-week hammering with a drop from $55 to $40. Since then stock has struggled.

One of the biggest challenges for restaurant stocks has been food inflation. Food prices have been climbing sharply the past several months. In the U.S. food inflation is running about +20%. A lot of that is due to surging prices in meat, eggs, and dairy. Guess who uses a lot of cheese? PZZA does.

PZZA's earning trend has been shaky. They missed earnings last November. February's report was only in-line with estimates. May's announcement missed estimates. Their most recent earnings report was August 5th. Wall Street expected a profit of $0.42 a share on revenues of $384.8 million.

PZZA delivered a profit of $0.40 with revenues up +9.1% to $380.9 million. That's a miss on both counts. The company said same-store sales in North America were up +6% and overseas up +8.6%. That looks healthy. Yet their 40-cent profit lines up with a 39-cent profit a year ago. Sales are up but profits are flat? The biggest culprit is probably rising ingredient costs. Management did raise their 2014 guidance but even after they raised guidance it was still below Wall Street's consensus.

The company is still expecting relatively decent sales growth but it doesn't seem to be fast enough to satisfy Wall Street. The recent breakdown under support near $40.00 is bearish. The point & figure chart is bearish and forecasting a $32 price target.

Tonight we are suggesting bearish positions immediately. We're not setting an exit target yet. I will point out potential support on the weekly chart (see below). The path of least resistance for PZZA definitely looks lower.

FYI: PZZA does have options but the spreads are too wide to trade them.

- Suggested Positions -

Short PZZA stock @ $39.56

08/25/14 trade begins. PZZA gaps higher at $39.56

Transocean Ltd. - RIG - close: 38.52 change: +1.04

Stop Loss: 40.01
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.4 million
New Positions: Yes, see below

08/26/14: RIG did not want to cooperate with us today. The market's widespread rally this morning could have spooked some shorts and once they started covering it fed on itself. Of course we're only talking about a bounce toward short-term resistance at its 10-dma.

Currently we are on the sidelines with a suggested entry point at $37.25. However, if this bounce continues we might consider a different entry point near resistance in the $39.50 area. Let's wait and see how RIG performs tomorrow.

Earlier Comments: August 25, 2014:
The oil drillers could be facing a significant downturn due to lower demand and rising supply. That's a tough combination for any business.

RIG is one of the biggest. According to the company website, "We are a leading international provider of offshore contract drilling services for energy companies, owning and operating among the world's most versatile fleets with a particular focus on deepwater and harsh-environment drilling. Our fleet of 79 mobile offshore drilling units includes the world's largest fleet of high-specification rigs consisting of ultra-deepwater, deepwater and premium jackup rigs. In addition, we have seven ultra-deepwater drillships and five high-specification jackups under construction."

The company's latest earnings report on August 6th looked pretty good. Wall Street was expecting a profit of $1.12 a share. RIG delivered $1.61 - blow out number. Revenues also beat estimates at $2.33 billion versus the $2.29 estimate but revenues were down from a year ago. Investors ignored the better than expected results. That's because the industry is facing a number of headwinds.

Day rates are dropping and more rigs are sitting idle. Analysts are lowering estimates due to rising down time. RIG's latest fleet update showed that out-of-service time for 2014 had risen by 28 days. Their 2015 projected out-of-service time had surged 236 days. That is significant when you consider that these rigs get paid hundreds of thousands of dollars per day they operate. Of course those numbers are coming down.

Angie Sedita, an analyst with UBS, said, "We believe dayrate pressure will persist given limited rig tenders (demand) and fierce competition, with dayrates already down 25%-40% from peak levels."

Raymond James analyst Praveen Narra provided more details on their bearish outlook. According to Narra:

After a decade of good times, the deepwater drilling rig market is facing a multiyear down-cycle. Historically, most offshore drilling cycles have been short-lived as there have usually been sudden demand shocks that tend to self correct relatively quickly. This time, it is more of a new rig supply problem compounded by a moderation in offshore spending from the suddenly “return driven” multinational major oil companies. That means this down-cycle should be more drawn out than usual. Specifically, we think the downturn will take about three years to play out with average floater day-rates falling about 25% with over 60 floating rigs needing to be stacked (either warm stacked or cold stacked). More importantly for investors, we think consensus 2016 floater estimates (on average) are still about 25% too high. Put another way, earnings multiples are not as attractive as some now think, in our view. Obviously, the lower-end, older floating assets will be hit the hardest. While everyone loses in this environment...

If you're curious a "stacked" rig is not in service. They can be warm stacked, which means they are idle but still have a crew and ready for deployment. A cold stacked rig has essentially been mothballed.

The bearish outlook for RIG is evident in the stock's decline. Shares just broke down under support near $38.00. The Point & Figure chart is bearish and forecasting at $30.00 target but this target could fall further. It is worth noting that there are a lot of traders already bearish on RIG. The most recent data listed short interest at 18% of the 327 million share float. That can spark short squeezes like the one back in April and again in June.

Tonight we are suggesting a trigger to launch bearish positions at $37.25.

Trigger @ $37.25

- Suggested Positions -

Short RIG @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the OCT $35 PUT (RIG141018P35)

Option Format: symbol-year-month-day-call-strike

Sprouts Farmers Market, Inc. - SFM - close: 30.68 change: +0.09

Stop Loss: 30.65
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on August -- at $---.--
Listed on August 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below

08/26/14: The bounce in SFM managed another day of very small gains. There is no change from my prior comments.

If the bounce continues we will probably drop SFM as a bearish candidate soon.

Our suggested entry point is $28.95.

Earlier Comments: August 18, 2014:
There is a growing pile of evidence that Americans are starting to eat healthier. It's about time. 66% of Americans are overweight and 33% of us are clinically obese. This new trend of healthier eating helps explain falling sales at restaurants like McDonalds and strong sales for rivals like Chipotle (which many consider to be a healthier choice). Today's trade isn't about restaurants. It's about the natural and organic trend in grocery stores.

Most people think of Whole Foods Market (WFM) when they consider natural and organic grocery chains. WFM is a dominant player with 388 stores. Sprouts (SFM) is catching up. The first Sprouts store started in Arizona back in 2002. Today they have more than 180 stores. Unfortunately for SFM they are facing the same issues WFM is.

Natural and organic foods used to offer higher margins in a notoriously low-margin business - grocery. It wasn't long before everyone has started promoting their natural and organic options. Traditional food chains as well as major nationwide players like Wal-Mart and Target. All of this competition is pressuring margins and sales growth.

Keep in mind, SFM is still growing. Their latest earnings report was August 7th and SFM beat estimates with a profit of 20 cents a share. That's a +43% jump in earnings from a year ago. Revenues were up +19.5% to 743.8 million, also above estimates. SFM management raised their 2014 guidance although this didn't have much impact since they only raised guidance to match Wall Street's consensus.

This issue doesn't seem to be growth. Investors are bearish on rising competition. It doesn't help that SFM isn't cheap with a current P/E of almost 52. It also didn't help that several major shareholders just sold 15 million shares at $30 a few days ago. This big sale doesn't breed confidence for investors.

Technically SFM appears to be in a major down trend of lower highs and lower lows. The P&F chart is bearish and forecasting at $23.00 target. SFM barely moved today in spite of a relatively widespread market rally.

Currently SFM is hovering just above support near $29.10. If this stock breaks down it could test its 2014 lows and potentially hit new ones. Tonight we're suggesting a trigger for bearish positions at $28.95.

Trigger @ $28.95

- Suggested Positions -

short SFM stock @ $28.95

- (or for more adventurous traders, try this option) -

Buy the DEC $27.50 PUT (SFM141220P27.5)

Option Format: symbol-year-month-day-call-strike